Monday, 18 March 2019
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Bernie Sanders’ Social Security Overhaul Proposal Is Back – The Motley Fool

Sen, Bernie Sanders, an independent and former Democratic presidential hopeful from Vermont, wants Washington to get serious about Social Security. And he does have a point.

According to the June-released Board of Trustees report, Social Security is dangerously close to hitting an unwanted inflection point. Namely, it’s going to be expending more than it collects in revenue each year, and that hasn’t happened since 1982. As demographic changes, such as the long-term lengthening of life expectancies, growing income inequality, lower fertility rates, and the retirement of baby boomers continues, the expected net cash outflow from Social Security should grow.

Dice lying next to a piece of paper that reads, Will Your Social Security Be Enough?

Image source: Getty Images.

If there is some solace here, it’s that the program is in no danger of going bankrupt, thanks to its sources of recurring revenue — the 12.4% payroll tax on earned income, and the taxation of Social Security benefits on individuals and couples earning over certain income thresholds. Social Security also has nearly $2.9 trillion in asset reserves, meaning time exists for lawmakers to change the program for the better.

But here’s the issue: As these net cash outflows widen, Social Security’s asset reserves will start to be depleted. By 2034, the trustees project that the entirety of the program’s excess capital will be gone. Should this capital be exhausted and the payout schedule proved to be without question unsustainable, across-the-board benefit cuts of up to 21% could follow. With 62% of today’s retirees reliant on Social Security for at least half of their income, it’s an outlook that’s a source of much concern.

Social Security is facing an estimated $13.2 trillion cash shortfall over the long run, which is defined as the next 75 years — i.e., through 2092. The question has been, and remains, how best to resolve this funding gap. The progressive senator from Vermont believes he has the answer.

The Social Security Expansion Act is back

Following its initial introduction in March 2015, and a second go-around in February 2017, Sanders and co-sponsors Sen. Cory Booker (D-N.J.), Sen. Kirsten Gillibrand (D-N.Y.), Sen. Jeff Merkley (D-Ore.), Sen. Kamala Harris (D-Calif.), and Rep. Peter DeFazio (D-Ore.) have introduced the Social Security Expansion Act for a third time.

Sen. Bernie Sanders speaking at the American Legion National Convention.

Sen. Bernie Sanders speaking at the American Legion National Convention. Image source: Bernie Sanders’ Senate website.

The Social Security Expansion Act, as the name implies, aims to expand benefits for lower-income individuals and families that depend on the program the most, while raising additional revenue to cover Social Security’s imminent cash shortfall, and its projected higher cash needs to expand benefits. Here’s a rundown of what Sanders’ plan would entail. 

  • Institutes a doughnut-hole tax above $250,000 in earnings: Currently, all earned income between $0.01 and $132,900 is subject to Social Security’s 12.4% payroll tax. Under Sanders’ plan, a “doughnut hole” would exist between the maximum tax cap of $132,900, which rises annually in step with the National Average Wage Index, and $250,000, where earned income wouldn’t be subject to the payroll tax. Beyond $250,000 in earned income, the payroll tax would be reinstituted, leading to additional revenue collection.
  • Changes the inflationary tether to the CPI-E: The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) has been Social Security’s inflationary measure for cost-of-living adjustments (COLA) since 1975. But, as the name implies, it doesn’t measure the spending habits of seniors, thereby underweighting medical care and housing expenditures and overweighting other costs that don’t matter as much. Switching to the Consumer Price Index for the Elderly (CPI-E) would help remedy this problem by focusing on the costs that matter to households with seniors aged 62 and up. Presumably this would lead to higher annual COLAs.
  • Increases benefits for lifetime low-earners: This provision is designed to make it easier for low-income earners to qualify for a Social Security benefit, as well as to ensure that minimum benefits paid increase substantially for those involved in the workforce for many decades. For context, the minimum monthly benefit today is well below the federal poverty level.
  • Adds a 6.2% tax on investment earnings for high-income individuals: Right now, the net investment income tax (NIIT) hits investment earnings for people with modified adjusted gross income (MAGI) above $200,000, and couples over $250,000, with a 3.8% surtax. Under Sanders’ proposal, the NIIT would increase to 10%, providing a 6.2-percentage-point higher tax on investment income for well-to-do individuals and couples that would help fund Social Security.
  • Restores student benefits up to age 22 for children of disabled or deceased workers: This provision would restore what was taken away during the Amendments of 1983, thereby allowing post-secondary students the ability to once again receive benefits.
  • Provides an across-the-board benefit increase: Lastly, primary insurance amounts would be adjusted to provide higher benefits across the board. According to the proposal, the average low-income beneficiary would see their payout increase by about $1,342 a year.

Apply these changes, and Sanders’ bill should extend Social Security’s cash depletion date out 52 years, to 2071. 

An elderly man counting a fanned pile of cash bills in his hands.

Image source: Getty Images.

Is the third time the charm?

Now, for the all-important question: Is the third time the charm for Sanders’ Social Security Expansion Act? Well… no.

The first issue Sanders would have to overcome is that his bill isn’t even the most popular progressive Social Security proposal being floated on Capitol Hill. Within the past few weeks, Rep. John Larson (D-Conn.) reintroduced the Social Security 2100 Act, also for the third time. However, Larson’s bill was introduced this time around with more than 200 co-sponsors. With a Democrat-run House, it has a reasonable shot at coming up for vote and passing. However, since the Senate and presidency are under GOP control, the bill will probably be dead on arrival in the Senate, and/or President Trump would veto it, as he isn’t in favor of direct fixes to the program.

Another problem with Sanders’ proposal is that the CPI-E doesn’t entirely resolve the inflation problem that seniors are contending with. Yes, the CPI-E would presumably account for medical care and housing inflation much better than the CPI-W has been doing. But there are still deficiencies. For example, the CPI-E doesn’t factor in Medicare Part A costs. Long story short, the purchasing power of Social Security income would keep declining under Sanders’ plan, just at a slower pace than it does currently.

However, the biggest problem with Sanders’ plan is that it fails to take into account the response of wealthy individuals to higher tax rates. If we look into our history books to a time when marginal tax rates on the rich were considerably higher, we often find that the rich become creative at legally avoiding taxes. Even though federal taxes are many times easier to avoid than FICA taxes (for Social Security and Medicare), it’s possible we could see less revenue collected than expected as the wealthy shift their income recognition. Thus, it could wind up having a negative impact on the long-term growth rate for the U.S. economy.

While Sanders’ plan offers a number of well-liked improvements, it still leaves a lot to be desired, fundamentally.

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Source: https://www.fool.com/retirement/2019/02/24/bernie-sanders-social-security-overhaul-proposal-i.aspx

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